But a Good Try

A multi-million-dollar estate and GSTT case turns out to be a lot less when Judge Morrison boils it down, in Estate of John F. Koons III, Deceased, A. Manuel Zapata, Personal Representative, 2013 T.C. Memo. 94, filed 4/8/13.

I was hoping for some hot news on GSTT, but only got the usual battle of the appraisers. The only interesting part was worthy of a Taishoff “good try”, when A. Manuel borrowed $10,750,000, but claimed an interest deduction north of $71 million.

The late Koons was a Cincinnati beer brewer who transitioned to bottling Pepsi-Cola; he really hit the spot, and got bought out by Pepsi for telephone numbers. He dies in the middle of the buy-out, and the estate needs cash to pay the estate tax.

Of course, no such deal as this is complete without LLCs, trusts, children, grandchildren, ex-spouses and the whole corps de ballet. So here’s Judge Morrison with the story: “On February 27, 2006, CI LLC’s Board of Managers executed a consent resolving that ‘it is in the best interests of the Company to loan the * * * [Revocable Trust] the principal amount of $10,750,000.’

“On February 28, 2006, CI LLC lent the Revocable Trust $10,750,000 in exchange for a term promissory note in the principal amount of $10,750,000 at 9.5% per year interest with principal and interest due in 14 equal installments of  approximately $5.9 million each between August 31, 2024, and February 28, 2031. The terms of the loan prohibited prepayment. The total interest component of the 14 installments is $71,419,497. The proceeds of the loan would be used to make a payment toward the estate and gift tax liabilities.” 2013 T.C. Memo. 94, at pp. 30-31.

CI LLC is the buyer-out, and the Revocable Trust is the vehicle of the estate.

Good try, guys. Interest on a loan to pay estate taxes is deductible as an administrative expense, right?

Not twentyfive years’ worth.

In the first place, CI LLC was loaded with cash, and the Revocable Trust could force it to distribute, so no need to sell assets. Lending the money depletes CI LLC’s cash hoard as much as a distribution, and the Revocable Trust has almost no operating assets to protect from a forced sale to pay estate tax.

Finally, this deal keeps the estate alive for 25 years after the Late Koons became the Late Koons. Too long. But a good try, even though no deduction.